In the first three installments, we covered setting a sales price for your property, collecting a down payment and setting up the mortgage note, and being sure that you use the right documents. Now that the property has been sold and all of the right documents have been signed and recorded with the county, you can relax and wait for the payments to start coming in.
However, before you get too comfortable, one more decision for you is whether to receive payments yourself or have the payments for the mortgage note go through a servicing company. The advantages of collecting payments directly are:
You receive the payment sooner, as it is coming directly from the payer. To expedite the payment even more, you should encourage the payer to make each payment electronically rather than send a check.
You avoid the monthly fee that the servicing company will charge. Normally, that fee is only $10-15 on each payment, but you may decide that you would rather keep that money. The servicing company may also charge a fee to set up the account and have other fees, so be sure that you understand all potential costs.
If you decide to have the servicing company handle all of the payments, the advantages are:
The servicing company will manage all of the payments for your mortgage note, show the split between principal and interest, and provide the ending balance to you. If you are collecting taxes and insurance with each payment, they can also manage that separate escrow account for you.
The servicing company will usually handle any year-end tax reporting and forms for you.
The servicing company will usually hold on to the original note and deed of trust, thereby minimizing the chances of anyone losing them.
Some servicing companies will call the payer if the monthly payment is late, and may even work with you in the event of a default, where you would often need to foreclose.
Using a servicing company is highly recommended if this is one of your first real estate notes or if you are new to the real estate industry. They can help you make sure that nothing slips through the cracks and that you follow the letter of the law. If you are more experienced, the decision depends on how much time that you can dedicate to managing the accounts. For myself as a mortgage buyer, I have most of my mortgage notes serviced by an outside company that I trust, as I would otherwise spend a large percentage of my time just managing the portfolio of notes that I have.
Regardless of whether you use a servicing company or service the mortgage note yourself, be sure that you have all necessary contact information on the payer (home phone, cell phone, address). Especially for the first few months, you should closely monitor the payment schedule and call the payer promptly if they pay after the due date and grace period. If the payer frequently makes late payments or even misses payments, stay in close contact with him or her to understand their situation. Be pleasant and courteous, but be sure that they understand the need to make on-time payments.
If the payer is having some short-term financial issues, you should consider letting them make a reduced payment for a month or two, and make up for it later. That is much better than having to foreclose, which is no fun for anyone and will be covered in the next article.
Alan Noblitt is the owner of Seascape Capital Inc., which buys real estate notes. He may be reached at (858) 672-4678 or toll-free at 1-800-634-4697. If you would like to learn more about real estate notes and read informational articles, visit www.seascapecapital.com.
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Creating a Note – Collecting payments (Part 4 in the series)